Homework Answers
Question 1
Price of Preferred Stock = Annual constant dividend / Required Rate of return
55.9 = Annual constant dividend /.03
Annual constant dividend = 55.9*.03
= 1.68
Question 2
Using Gordon Growth Model
Po = D1 / (Ke – g)
Where,
Po – Current share price = 40.35
D1 – Next year expected dividend = .9
Ke – Cost of equity = 6%
G – Growth rate in dividend = ?
40.35 = .9/(.06-g)
.06-g = .9/40.35
= 0.02230483271
g = .06-0.02230483271
= 0.03769516729
= 3.77%
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